You won't find your intangibles on a Balance Sheet
October 1, 2022
By Ron Elliard
It can be argued that Intangible assets embody the most value in virtually every company. Therefore, it makes sense to showcasing those intangibles that make your company unique and successful. How you show and what you show, will significantly impact the value of your final transaction. So how do you leverage your intangibles while still making your company easy to operate and not a management nightmare.
Intangible assets are non-physical assets such as contracts, customer lists, proprietary software, databases, designs, recipes, proprietary business processes, well protected trade secrets, works of authorship, key employees, strategic relationships, audit reports, credentials, licenses, and brand recognition. Intellectual property (“IP”), such as patents, trademarks, and copyrights, are all intangible assets. These assets generally produce value for a company, but don’t appear on its balance sheet.
Three steps to inventory your intangible assets:
- Conduct an internal audit of your business operations to identify all intangible assets owned by or used in the business and gather appropriate supporting documentation for each asset.
- Prepare a detailed description of each item including the nature, scope and history of the asset, how it is used, its original cost, past and future economic benefits, ownership, licenses and any legal restrictions, useful life, potential threats, etc. Include references to supporting documentation.
- Group assets into appropriate asset classes (by type and business function) and save the supporting documents in a well-organized virtual data room.
Engaging the services of legal, financial, and valuation experts can help bring to light intangible assets that may not be immediately obvious. An attorney can verify ownership rights and ensure that your assets are properly protected and legally transferable.
When taking a business to market advisors prepare a marketing document known as a Confidential Information Memorandum (CIM) or Pitch Deck. The CIM will highlight your company’s intangible assets and suggest how buyers can utilize them to create new revenue streams, increase profits, or mitigate potential risks. Of course, buyers will do their own due diligence on your assets, and lots more, before closing the deal, so all assertions in the CIM must be reasonable. Overhyping a company can be a quick turnoff for buyers.
Your advisor or investment banker may also uses your intangible asset documentation to help them identify potential acquirers that stand the most to gain from obtaining access to those assets.
Intangible assets can exist and not have value to their current owner. When a target business is profitable and growing, it usually isn’t necessary to place values on individual intangible assets for sale purposes. If a business is a pre-revenue startup or marginally profitable, or if certain intangible assets aren’t being used productively in the business, it may be helpful to have an expert determine the economic value of individual assets.
Even owners with long expected hold periods can benefit from identifying and monitoring their company’s intangible assets by using this information in strategic planning and investment decision making. The asset inventory and supporting documents should be reviewed and updated periodically by the executive team as part of its planning process.
Having a full inventory of your company’s intangible assets is an advantage when marketing and negotiating the sale of a business. Take the time to identify and document your intangible assets to ensure that you receive the best possible reward for your life’s work.
Ron Elliard is president and founder of Rampart Wealth Management. For further information on leveraging your intangible assets in a business sale or to discuss a potential M&A or other exit strategy please contact Ron at 603-374-7880 all information is held is strict confidence relliard@rampartwealthmanagement.com